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Good Col 1 Steel Steel Machine Tyres Cars Total value of transaction Seller Col 2 Buyer Col 3 Steel producer Steel producer Machine producer Tyre producer Car producer Machine producer Car producer Car producer Car producer - Trans Value Col 4 100,000 300,000 200,000 50,000 Consumer 500,000 - 1,150,000 Good Col 1 Seller Col 2 Buyer Col 3 Steel Steel producer Machine producer 100,000 100,000 Steel Steel producer Car producer 300,000 300,000 Machine Machine producer Car producer 200,000 100,000 Tyres Tyre producer Car producer 50,000 50,000 Cars Car Consumer producer 500,000 150,000 1,150,000 700,000 Total - - Trans Value Value added Col 4 Col 5 Good Col 1 Seller Col 2 Buyer Col 3 Trans Value Col 4 Exp on final goods Col 6 Steel Steel producer Machine producer 100,000 - Steel Steel producer Car producer 300,000 - Machine Machine producer Car producer 200,000 200,000 Tyres Tyre producer Car producer 50,000 Cars Car Consumer producer Total - - 500,000 500,000 1,150,000 700,000 Good Col 1 Seller Col 2 Buyer Col 3 Value added Col 5 Factor earnings Col 7 Steel Steel producer Machine producer 100,000 100,000 Steel Steel producer Car producer 300,000 300,000 Machine Machine producer Car producer 100,000 100,000 Tyres Tyre producer Car producer 50,000 50,000 Cars Car Consumer producer 500,000 150,000 700,000 700,000 Total - - Trans Value Col 4 Value added Col 5 Exp on final goods Col 6 Factor earnings Col 7 100,000 100,000 - 100,000 300,000 300,000 - 300,000 200,000 100,000 200,000 100,000 50,000 50,000 500,000 150,000 150,000 150,000 1,150,000 700,000 700,000 700,000 50,000 GDP NFI can be negative or positive, i.e. GDP can be greater or less than GNP Net factor incomes from abroad Depreciation GNPMP Indirect Taxes GDPMP Rental Income NNPMP Profits NNPFC Def of GNP Def of GDP Def of NNPMP Def of NI Income from self employment Wages & salaries Factor earnings Real GDPyear a = Nominal GDPyear a x Price Indexbase year Price Index year a Example • Nominal GDP was $150 billion in 1985 & $300 billion in 1994. • ASSUME that prices have risen by 50% over the period. •Real GDP in 1994 measured in 1985 prices: •= $300 billion x 100/150 = $200billion Hypothetical economy Apples produced Chicken produced cost per apple Rs cost per chicken Rs Year 1 Year 2 100 150 100 140 2 4 4 6 • Nominal GDP in year1 = (100 x 2) + (100 x 4) = 600 • Nominal GDP in year2 = (150 x 4) + (140 x 6) = 1440 • Growth rate in nominal GDP = 1440 – 600 = 140% 600 • Year2 price index = 150 x 2 + 140 x 4 = 2.966 at Year1 prices 290 • Year2 price index = 150 x 4 + 140 x 6 = 4.966 Current year price index 290 at Year2 prices GDP deflator: 2.966X = 4.966 x100 X = 167.4% which is the price level in percentage terms prevailing in the current year (Year2) relative to the price level of Year1 Real GDP = 1440 x 100 = 860 167.4 Growth rate = 860 – 600 = 43% 600
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